Correct Option
The money multiplier indicates the extent to which the money supply expands for each unit increase in the monetary base. It is inversely related to the cash-deposit ratio and the reserve ratios (Cash Reserve Ratio and Statutory Liquidity Ratio).
An increase in the banking habit of the population signifies that individuals prefer to hold a larger proportion of their money in bank deposits rather than as physical currency. This reduces the currency-deposit ratio. When more funds are deposited in banks, their lending capacity increases, leading to a greater expansion of credit and, consequently, a higher money multiplier effect in the economy.
Incorrect Options
- Increase in the cash reserve ratio (a): The Cash Reserve Ratio (CRR) is the percentage of a bank's Net Demand and Time Liabilities (NDTL) that it must hold as reserves with the central bank. An increase in CRR reduces the funds available with banks for lending, thereby decreasing their credit creation capacity and lowering the money multiplier.
- Increase in the statutory liquidity ratio (c): The Statutory Liquidity Ratio (SLR) is the percentage of NDTL that commercial banks are required to maintain in the form of liquid assets (cash, gold, or approved securities). An increase in SLR also reduces the funds available for lending, thus diminishing the money multiplier.
- Increase in the population of the country (d): An increase in the population, in isolation, does not directly lead to an increase in the money multiplier. The money multiplier is primarily influenced by factors affecting the banking system's ability to create credit and the public's currency-deposit preferences. While population growth might increase the overall demand for money, it does not inherently alter the multiplier mechanism unless accompanied by changes in banking habits or financial inclusion.